Apple
Inc.
is preparing to ship iPhones to
China Mobile
Ltd.
, people familiar with the matter say, an arrangement that would significantly increase Apple's distribution in the world's biggest smartphone market.

A deal would cap years of negotiations between the two companies. Apple has tried to hammer out an agreement with China's largest wireless carrier, which has 700 million subscribers, seven times the size of the U.S.'s largest carrier, Verizon Wireless. Greater China is Apple's third-biggest market, after the U.S. and Europe, in terms of sales.

Apple on Tuesday is expected to unveil two new iPhones. People familiar with the matter have said Apple would ship a new high-end model and a less-expensive version this month.

Apple has asked contract manufacturer
Hon Hai Precision Industry
Co.
, also known as Foxconn, to add China Mobile to the list of carriers slated to receive a new low-cost iPhone, one of the people said. It wasn't clear if the two sides signed an official agreement or when the phones would be delivered.

The decision to offer a less-expensive iPhone to China Mobile, one of the world's last major operators that doesn't carry Apple's smartphones, comes at a critical moment for Apple. The iPhone, Apple's best-selling product, is losing share to models from such competitors as
Samsung Electronics
Co.
, and Apple is wrestling with the perception the company is starting to lose its innovative touch.

In its fiscal third quarter, which ended June 29, Apple's sales in Greater China fell 14% from a year earlier to $4.6 billion. Apple's market share in China meanwhile fell to 5%, ranking the company seventh., behind market leader Samsung, which had 18%, and domestic manufacturers such as
Lenovo Group
Ltd.
and Huawei Technologies Co., according to research firm Canalys.

China represents a significant growth opportunity for Apple, Chief Executive
Tim Cook
said in April, citing the large number of potential first-time smartphone buyers there. Apple also pledged to double the 11 stores it has in the country in less than two years.

Overall smartphone shipments in China are estimated to rise 84% to 352 million units this year, or more than double that of the U.S., before increasing to 421 million units in 2015, according to Canalys. China overtook the U.S. as the world's biggest smartphone market last year, making it more important for Apple to have more access to the market.

Apple initially was reluctant to offer its iPhone to China Mobile's unique and relatively unreliable third-generation network, which slowed download speeds and made producing phones for the carrier more expensive, according to a person familiar with Apple's thinking. Meanwhile, China Mobile bristled at Apple's insistence on sales-volume guarantees, a person familiar with the talks said.

Another issue that has hampered Apple's success in the country has been the phone's price, which is considered expensive for a majority of consumers, particularly when compared with domestic brands. Whereas U.S. carriers provide subsidies to lower the upfront costs of purchasing an iPhone, Chinese carriers' subsidies kick in later as refunds that can lower monthly phone bills.

But the two companies now are in a position where they need each other. Apple's China sales have fallen, while China Mobile has been losing subscribers to
China Unicom
Ltd.
and
China Telecom
Corp.
, which already offer the iPhone.

The iPhone 5 is selling for about 5,000 yuan ($815) without subsidies. The majority of smartphones shipped in China in the second quarter cost less than $200. Though Apple hasn't disclosed details about the less-expensive iPhone, analysts estimate it could come in at around $400, placing it in the midrange of Chinese handsets.

"The cheaper iPhone is definitely a game changer," said
TZ Wong,
a China smartphone analyst for research firm IDC. "For Apple, this will be an inflection point."

Morgan Stanley analyst
Katy Huberty
in an August research report estimated that a $400 iPhone could increase Apple's China market share by 13 percentage points through the sale of an additional 20 million iPhones, potentially snatching away local customers from Samsung,
HTC
Corp.
and Lenovo. A deal with China Mobile, she wrote, could raise that sales bump to 32 million units, or about a quarter of the 125 million iPhones sold globally in the past fiscal year.

Apple's current iPhone customers in China are mainly from affluent cities such as Beijing or Shanghai. But the growth opportunity is in smaller cities and towns where China Mobile is dominant and customers are now starting to trade in simpler phones for smartphones. The sales network in those areas is also less developed and more dependent on the influence of carriers.

"For Apple's less expensive iPhone to really work, it is critical for Apple to make it happen with China Mobile," said
Nicole Peng,
China research director at Canalys.

In Shijiazhuang, a city of 10 million people several hours south of Beijing, 22-year-old Guo Jie is the type of consumer Apple targets. Browsing the aisles of an indoor electronics mall in the city center, Mr. Guo said he wanted to upgrade his Samsung feature phone with a simple and cheap phone. But he said he would be willing to pay a little more for an iPhone. "If it is 3,000 yuan, I would buy it," he said.

Ma Tao, who owns a cluttered booth in the mall selling everything an array of items, including smartphones, laptops and electric razors, said many of his customers consider buying the older iPhone 4 because it is less expensive than the iPhone 5. Most choose an alternative because the iPhone 4 is seen as too dated.

If Apple can provide a less-expensive iPhone that looks like the latest model, Mr. Ma said "it will definitely be big."

The pricing pressure is especially intense, because the leading Chinese competitors—which includes
ZTE
Corp.
, Yulong Computer Telecommunication Scientific (Shenzhen) Co. and Xiaomi Inc.— are willing to sacrifice short-term profits in exchange for market share, assuming that today's entry-level consumers will be a foundation for the future.

Perhaps no competitor embodies this mentality more than Xiaomi pronounced sheow-mee. It has grown quickly by offering smartphones with top hardware specs on the cheap and marketing flair. Though relatively unknown outside of China, Xiaomi sells the phones at low prices and tries to generate revenue later through Internet services that it offers on the phones, such as games and messaging. The company this month hired an executive from
Google
Inc.
's Android business,
Hugo Barra,
as it tries to expand overseas.

The company recently released its newest flagship smartphone, the Xiaomi 3, which is priced at 1,999 yuan and will be available on all three of China's carriers. The company also recently targeted China Mobile users with a 799 yuan phone. Xiaomi passed Apple in market share in the second quarter.

The low-price phones also mean that consumers expect more bang for the buck when they are paying a little more.

In June, Huawei released its flagship smartphone, the Ascend P6, which is thinner than the iPhone 5 and comes with a 4.7-inch high-resolution screen. Even though the P6 is Huawei's most expensive handset, its 2,688 yuan price tag is roughly half of the iPhone 5.

Shao Yang,
chief marketing officer at Huawei's device business, said consumers can now choose between buying its top-of-the-line smartphone or the lesser iPhone. "People who buy the iPhone often like to keep it out of their bags and put it on the table so other people can see it," he said. "But if it is the cheaper iPhone it may not be so easy to put it on the table."

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